Is it possible to unlock iOS 4.1 on an iPhone 3G? I tried doing a couple of searches but couldn't find anything (might've been using the wrong keywords). But I currently have an iPhone 3G with baseband 5.13.04. If I upgrade to iOS 4.1, does it upgrade my baseband too or is baseband strictly hardware? As long as I can jailbreak my iPhone and put Cydia on it, I can unlock it with ultrasn0w, right?

Nooo!!! 4.1 has a so far, possibly never, unlockable baseband...
There is a way to update whilst preserving your baseband, I'll try find the link..
Anyway 4.1 is only jb-able using redsn0w, but being as it hasn't been updated it renders many things unusable:
Slide to power off
Phone app
Wifi
Fetching mail and cydia repos